1. Qualification Guidelines & Credit Score Flexibility
FHA loans, insured by the Federal Housing Administration, are designed to assist buyers with lower credit scores or smaller cash reserves. FHA guidelines allow down payments of just 3.5% for borrowers with credit scores of 580 or higher. Borrowers with scores between 500 and 579 can still qualify by putting down 10%.
Conventional loans, which are not insured by the federal government, have stricter credit requirements. Borrowers generally need a minimum credit score of 620 to qualify. Furthermore, conventional interest rates and PMI premiums are highly sensitive to credit tiers; a lower score will result in significantly higher monthly payment quotes.
2. Mortgage Insurance Structures: Cancelable PMI vs. Lifetime MIP
The structural difference in mortgage insurance is often the deciding factor between these two loan types. Conventional loans require Private Mortgage Insurance (PMI) only if the down payment is under 20%. Crucially, conventional PMI is cancelable: it can be removed once you build 20% equity, either through principal payments or home appreciation.
FHA loans require both an Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount (which can be rolled into the loan balance) and an ongoing monthly Mortgage Insurance Premium (MIP). If you put down less than 10% at purchase, FHA MIP cannot be cancelled and remains active for the entire duration of the loan, requiring a future refinance to eliminate.
3. Property Condition Standards & Appraisal Guidelines
Appraisal guidelines differ between FHA and conventional loans. A conventional appraisal focuses primarily on property valuation to protect the lender's collateral interest. While the appraiser notes major structural defects, they do not perform a detailed safety inspection.
An FHA appraisal is far more stringent. The appraiser must verify that the property meets HUD's minimum property standards for safety, security, and soundness. Issues like peeling paint (in homes built before 1978), missing handrails on stairways, exposed wiring, non-functional heating systems, or crawlspace moisture must be repaired by the seller before the loan can close.
4. Maximum Loan Limits & Regional Variations
Both FHA and conventional loans are subject to maximum limits that dictate how much you can borrow. Conventional loan limits are adjusted annually by the FHFA based on national average home price changes. High-cost counties have elevated limits to account for local market appreciation.
FHA loan limits are set independently and are typically pegged at 65% of the national conforming limit. While FHA limits are lower in most counties, they are adjusted upward in high-cost metro areas. If your purchase price exceeds FHA limits, you must secure conventional financing or qualify for a jumbo loan program.